Fixed or Variable
November 9, 2015
Its been a long time in coming, but we are going to finally weigh in on probably the most common question asked by people when getting a mortgage: should I get a fixed or a variable mortgage?
You’ve probably heard someone say if you have trouble sleeping at night knowing that your rate may increase at any moment under a variable, then fixed is the way to go. This is definitely oversimplification, and there are a few more things to think about before making your decision.
The main benefit of a fixed mortgage is you have a guaranteed rate locked in for your entire term. This can be incredibly useful for anyone who wants to have a set budget to work with on a month to month basis – whether you are new family and have a tight budget to work with, or you are simply the type of person who wants to have a defined budget on paper so you can plan your finances out accordingly.
The downside to a fixed mortgage is your rates will be higher than a variable – anywhere from 0.6 to 1% at the time of writing. So while you are guaranteeing a locked in payment for the duration of your term, you will be paying a higher rate for it (at least from the get-go, not accounting if variable rates increase). You can think of this higher rate as an insurance almost – you know you are paying a guaranteed rate for the next 5 years, say, but you pay a premium to do so.
First off, a variable mortgage will have a lower rate. Calculated against prime as a plus or minus, however, the rate will increase or decrease as the prime rate moves up or down. So while you can benefit if the interest rate goes down, so too will you have to suffer if the rate happens to jump up. This is the risk associated with the variable mortgage – pay a lower rate than a fixed, but know that your rate may move around.
Where variable rates can be confusing to some is whether you have a fixed payment (a true variable) or an ARM (Adjustable Rate Mortgage) where your payment on the interest portion of your mortgage will increase or decrease as the rate adjusts. We’ve put together an article on the difference – check it out here.
The other thing to consider with variable rate mortgages is that, with most lenders, you can lock into a fixed rate at any moment. The question to ask though is at what rate you are locking into. The difference between converting to a fixed at the best fixed rate versus the posted fixed rate can be the difference of more than 2%! If you are considering a variable mortgage, we will provide the lenders who only offer the best products so you can avoid any of these hefty rate differences.
So that leaves you with more things to consider before making your decision on whether to go with a fixed or variable. People will speculate on whether the interest rates will increase or decrease, and you will find an endless amount of articles online presenting their theories one way or another. The truth is though, is that these are theories and speculation. Think beyond that when making your choice, and you can always ask questions to us to help you along.